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Competition, syndication, and entry in the venture capital market

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  • Suting Hong

Abstract

There are two ways for a venture capital (VC) firm to enter a new market: initiate a new deal or form a syndicate with an incumbent. Both types of entry are extensively observed in the data. In this paper, I examine (i) the causes of syndication between entrant and incumbent VC firms, (ii) the impact of entry on VC contract terms and survival rates of VC-backed start-up companies, and (iii) the effect of syndication between entrant and incumbent VC firms on the competition in the VC market and the outcomes of incumbent-backed ventures. By developing a theoretical model featuring endogenous matching and coalition formation in the VC market, I show that an incumbent VC firm may strategically form syndicates with entrants to maintain its bargaining power. Furthermore, an incumbent VC firm is less likely to syndicate with entrants as the incumbent?s expertise increases. I find that entry increases the likelihood of survival for incumbent-backed start-up companies while syndication between entrants and incumbents dampens the competitive effect of entry. Using a data set of VC-backed investments in the U.S. between year 1990 and 2006, I find empirical evidence that is consistent with the theoretical predictions. The estimation results remain robust after I control for the endogeneity of entry and syndication.

Suggested Citation

  • Suting Hong, 2013. "Competition, syndication, and entry in the venture capital market," Working Papers 13-49, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:13-49
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    References listed on IDEAS

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    Cited by:

    1. Lavanchy, Maude & Reichert, Patrick & Joshi, Amit, 2022. "Blood in the water: An abductive approach to startup valuation on ABC's Shark Tank," Journal of Business Venturing Insights, Elsevier, vol. 17(C).
    2. Cabolis, Christos & Dai, Mian & Serfes, Konstantinos, 2014. "Competition and Specialization: Evidence from Venture Capital," School of Economics Working Paper Series 2014-5, LeBow College of Business, Drexel University, revised 05 Oct 2014.

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    More about this item

    Keywords

    Entrepreneurship; Externalities (Economics); Venture capital; Entry; Contracts; Exernality; Efficiency; Coalition;
    All these keywords.

    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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